1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
-- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-28494
MILLENNIUM PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3177038
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
238 MAIN STREET, CAMBRIDGE, MA 02142
(Address of principal executive offices, including zip code)
617-679-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Number of shares of Common Stock, $.001 par value per share, outstanding as of
November 11, 1998 was 34,709,817.
2
MILLENNIUM PHARMACEUTICALS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three and nine months
ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II - OTHER INFORMATION 11
ITEM 5. OTHER INFORMATION 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
3
Millennium Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
SEPTEMBER 30, DECEMBER 31,
(in thousands, except par value and shares) 1998 1997
-----------------------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 34,456 $ 69,236
Marketable securities 35,512 27,321
Due from strategic partners 9,711 778
Prepaid expenses and other current assets 3,892 4,595
-----------------------------
Total current assets 83,571 101,930
Property and equipment, net 35,615 29,030
Restricted cash and other assets 10,792 5,140
Intangible assets, net 6,386 8,413
-----------------------------
$ 136,364 $ 144,513
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,972 $ 3,165
Accrued expenses 5,570 4,294
Deferred revenue 1,970 3,053
Current portion of capital lease obligations 8,232 5,847
-----------------------------
Total current liabilities 23,744 16,359
Capital lease obligations, net of current portion 22,282 19,809
Minority interest 7,177 16,590
Commitments and contingencies -
Stockholders' equity:
Preferred Stock, $0.001 par value;
5,000,000 shares authorized;
none issued - -
Common Stock, $0.001 par value:
100,000,000 shares authorized;
29,659,335 shares in 1998 and 29,169,398 shares
in 1997 issued and outstanding 30 29
Additional paid-in capital 196,547 193,254
Deferred compensation (1,165) (1,992)
Notes receivable from officers (111) (166)
Unrealized gain (loss) on marketable securities 66 (4)
Accumulated deficit (112,206) (99,366)
-----------------------------
Total stockholders' equity 83,161 91,755
-----------------------------
Total liabilities and stockholders' equity $ 136,364 $ 144,513
=============================
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed consolidated financial statements.
3
4
Millennium Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations and
Comprehensive Loss (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(in thousands, except per share and share data) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Revenue under strategic alliances $ 26,440 $ 13,650 $ 75,719 $ 37,978
Costs and expenses:
Research and development 30,014 20,442 80,479 50,374
General and administrative 6,090 4,146 17,928 12,009
Acquired in-process research and development - - - 83,800
Amortization of intangible assets 676 675 2,027 1,721
-------------------------------------------------------------
36,780 25,263 100,434 147,904
-------------------------------------------------------------
Loss from operations (10,340) (11,613) (24,715) (109,926)
Interest income 1,274 1,174 4,060 3,227
Interest expense (565) (410) (1,689) (1,046)
Minority interest 3,418 947 9,504 947
-------------------------------------------------------------
Net loss ($ 6,213) ($ 9,902) ($ 12,840) ($ 106,798)
=============================================================
Unrealized gain on marketable securities 89 30 70 26
Comprehensive loss $ (6,124) $ (9,872) $ (12,770) $ (106,772)
=============================================================
Basic and diluted net loss per share ($ 0.21) ($ 0.34) ($ 0.44) ($ 3.80)
=============================================================
Shares used in computing basic and
diluted net loss per share 29,552,411 28,889,249 29,434,404 28,092,337
=============================================================
See notes to condensed consolidated financial statements.
4
5
Millennium Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
(in thousands)
- -------------------------------------------------------------------------------
CASH USED IN OPERATIONS $(20,528) $(10,964)
INVESTING ACTIVITIES
Purchase of property and equipment (4,067) (5,626)
Sale of marketable securities 46,506 41,400
Purchase of marketable securities (54,697) (23,487)
-------------------------
Net cash (used in) provided by investing activities (12,258) 12,287
FINANCING ACTIVITIES
Acquisition of ChemGenics, net of cash acquired - 7,087
Sale of subsidiary stock - 20,000
Net proceeds from employee stock purchases 3,319 1,663
Repurchase of Common Stock (25) (23)
Payments of long-term debt - (1,200)
Payments of capital lease obligations (5,288) (3,635)
-------------------------
Net cash (used in) provided by financing activities (1,994) 23,892
-------------------------
(Decrease) increase in cash and cash equivalents (34,780) 25,215
Cash and cash equivalents at beginning of period 69,236 10,088
-------------------------
Cash and cash equivalents at end of period $ 34,456 $ 35,303
=========================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 10,146 $ 10,252
=========================
See notes to condensed consolidated financial statements.
5
6
MILLENNIUM PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
1- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Interim results for the three and nine-month periods ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further information, refer to
the financial statements and footnotes thereto included in the Company's Annual
Report on 10-K for the fiscal year ended December 31, 1997 which was filed with
the Securities Exchange Commission on March 26, 1998.
As of January 1, 1998, the Company adopted SFAS 130, Reporting
Comprehensive Income. SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net loss or shareholders' equity.
SFAS 130 requires unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
2- STRATEGIC ALLIANCE
On September 23, 1998, the Company announced the formation of an alliance
with Bayer AG ("Bayer"). Under the terms of the alliance, Bayer will receive
access to key technologies in genome research as well as a flow of
genomics-based drug development targets that are discovered by the Company
through its research efforts.
On November 10, 1998, Bayer made an equity investment of $96.6 million
representing approximately a 14% interest in Millennium and paid an initial
license fee of $33.4 million. Over the remaining five-year term of the
agreement, Millennium will undertake a research and discovery program and Bayer
will provide additional payments to Millennium which could total up to
$335.0 million in a combination of research program funding and performance
fees.
6
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "intends,"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors are set forth under the caption "Factors That May
Affect Results" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, which "Factors That May Affect Results" discussion is
expressly incorporated by reference herein.
OVERVIEW
Millennium Pharmaceuticals, Inc. ("Millennium" or the "Company"), was
incorporated in January 1993 and is applying a comprehensive platform of
genomics and related technologies to pursue multiple opportunities in the
discovery and development of life-science-based products and services. Most of
the Company's activities currently are directed at the field of human
healthcare. As used herein, the terms "the Company" and "Millennium" include the
Company's subsidiaries where appropriate in the context.
RESULTS OF OPERATIONS
QUARTERS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Revenue under strategic alliances increased to $26.4 million for the three
months ended September 30, 1998 (the "1998 Quarterly Period") from $13.7 million
for the three months ended September 30, 1997 (the "1997 Quarterly Period"). The
increase in revenue in the 1998 Quarterly Period is due primarily to revenue
from research funding and payments for technology transfer under the Company's
alliance with Monsanto Company (the "Monsanto alliance"). The Monsanto alliance
was entered into in October 1997 and, therefore, was not in place in the 1997
Quarterly Period.
Research and development expenses increased to $30.0 million for the 1998
Quarterly Period from $20.4 million for the 1997 Quarterly Period. The increase
was attributable primarily to increased personnel expenses as the Company hired
additional research and development personnel, increased purchases of laboratory
supplies, and increased equipment depreciation and facilities expenses in
connection with the expansion of the Company's research efforts.
General and administrative expenses increased to $6.1 million for the 1998
Quarterly Period from $4.1 million for the 1997 Quarterly Period. The increase
was attributable primarily to increased personnel expenses as the Company has
hired additional management, business
7
8
development, and administrative personnel, and to legal and consulting fees in
connection with the Company's business development, strategic alliances, and
information systems infrastructure.
The Company's total operating expenses increased to $36.8 million for the
1998 Quarterly Period from $25.3 million for the 1997 Quarterly Period, for the
reasons discussed above with respect to the increase in research and development
and general and administrative expenses.
Interest income was $1.3 million for the 1998 Quarterly Period and
$1.2 million for the 1997 Quarterly Period. The increase resulted from an
increase in the Company's average balance of cash, cash equivalents and
marketable securities. Interest expense increased to $.6 million for the 1998
Quarterly Period from $.4 million for the 1997 Quarterly Period due to increased
capital lease obligations.
Minority interest represents the minority shareholder interest of Eli Lilly
and Company ("Lilly") in the net loss for the 1998 and 1997 Quarterly Periods of
the Company's majority-owned subsidiary, Millennium BioTherapeutics, Inc.
("MBio").
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Revenue under strategic alliances increased to $76.0 million for the nine
months ended September 30, 1998 (the "1998 Nine Month Period") from
$38.0 million for the nine months ended September 30, 1997 (the "1997 Nine Month
Period"). The increase is due primarily to revenue from research funding and the
achievement of mutually agreed upon technology transfer objectives relating to
the Monsanto alliance, an alliance that was not in place during the 1997 Nine
Month Period. In addition, revenue relating to MBio's alliance with Lilly during
the 1998 Nine Month Period increased compared to the 1997 Nine Month Period. The
increase in revenues in the 1998 Nine Month Period as compared to the 1997 Nine
Month Period under the alliance with Lilly is primarily due to the fact that the
research program with Lilly began late in the second quarter of 1997.
Research and development expenses increased to $80.5 million for the 1998
Nine Month Period from $50.4 million for the 1997 Nine Month Period. The
increase was attributable primarily to increased personnel expenses as the
Company hired additional research and development personnel, increased purchases
of laboratory supplies, and increased equipment depreciation and facilities
expenses in connection with the expansion of the Company's research efforts.
General and administrative expenses increased to $18.0 million for the 1998
Nine Month Period from $12.0 million for the 1997 Nine Month Period. The
increase was attributable primarily to increased personnel expenses as the
Company hired additional management, business development, and administrative
personnel, and to legal and consulting fees in
8
9
connection with the Company's business development, strategic alliances, and
information systems infrastructure.
The Company's total operating expenses decreased to $100.4 million for the
1998 Nine Month Period from $148.0 million for the 1997 Nine Month Period. The
decrease is primarily attributable to a one-time charge of $83.8 million in the
1997 Nine Month Period for acquired in-process research and development
associated with the Company's acquisition of ChemGenics Pharmaceuticals, Inc.,
offset by increases in operating spending as described above.
Interest income was $4.1 million for the 1998 Nine Month Period and
$3.2 million for the 1997 Nine Month Period. The increase resulted from an
increase in the Company's average balance of cash, cash equivalents and
marketable securities. Interest expense increased to $1.7 million for the 1998
Nine Month Period from $1.0 million for the 1997 Nine Month Period due to
increased capital lease obligations.
Minority interest represents the minority shareholder interest of Lilly in
the net loss for the 1998 and 1997 Nine Month Periods of the Company's
majority-owned subsidiary, MBio.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has recognized approximately $228.3 million of
revenue under strategic alliances. As of September 30, 1998, the Company had
approximately $70.0 million in cash, cash equivalents and marketable securities.
This excludes $9.8 million of interest-bearing marketable securities classified
as restricted cash and other assets on the balance sheet which serve as
collateral for the Company's letters of credit.
During the nine months ended September 30, 1998, the Company used
$20.5 million of cash in its operations, purchased $4.1 million of property and
equipment, and used cash of $5.3 million to pay capital lease obligations. In
addition, during the nine months ended September 30, 1998, the Company acquired
equipment under capital leases of $10.1 million and received proceeds from
employee stock purchases of $3.3 million.
On November 10, 1998, in connection with the closing of the Bayer alliance,
the Company received $96.6 million as consideration for an equity investment and
$33.4 million as an initial license fee.
The Company believes that existing cash and marketable securities and
anticipated cash payments from its strategic alliances will be sufficient to
support the Company's operations for the foreseeable future.
YEAR 2000
The Year 2000 problem is the result of computer programs being written to
recognize two digits rather than four to define the applicable year, which
causes computer programs to interpret
9
10
a date using "00" as the year 1900 rather than the year 2000. This incorrect
recognition of dates may lead to the Company's inability to process data and
engage in normal business activities due to system failures or data
miscalculations. Accordingly, the Company has formed a Year 2000 task force that
has expanded the scope of the Company's prior assessment of its computer
systems, commercial software, and computer infrastructure used in its business
operations and any potential Year 2000 issues of its key vendors and suppliers.
The Company has determined that it has Year 2000 exposure in the following
areas: (i) software and hardware embedded in its laboratory equipment and
employed in its research and development programs, (ii) computer software and
hardware used in its business and facilities operations and (iii) computer
systems used by key vendors and suppliers with whom the Company does business.
The Company has begun to inventory all of the software and hardware
embedded in its laboratory and facilities equipment and employed in its research
and development programs to ascertain its Year 2000 compliance. The Company is
also conducting a survey of the vendors of the computer software and hardware
used in its operations and, to date, has not been informed of any Year 2000
compliance problems. Finally, the Company has begun to formulate procedures for
querying other third party vendors and suppliers with respect to their own Year
2000 compliance.
To date, the Company has spent an immaterial amount with respect to its
Year 2000 assessment and estimates that its costs to complete its assessment as
well as its corrective plan will not be material to the Company's financial
condition, results of operations or cash flows. However, there can be no
assurance that the Company will not incur costs greater than those currently
expected as a result of the implementation of any required remediation programs
or the failure of the Company or any key supplier or vendor to adequately
address Year 2000 issues.
The Company currently does not have a contingency plan in the event that it
or any of its key suppliers and vendors is unable to become Year 2000 compliant.
The Company will develop a contingency plan if the Company determines it or any
of its key vendors or suppliers is not likely to achieve its compliance
objectives.
10
11
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Any proposal submitted pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934, as amended, that a stockholder wishes to be considered
for inclusion in the Company's proxy materials for its 1999 Annual Meeting of
Stockholders must be received by the Secretary of the Company at the principal
offices of the Company no later than December 19, 1998.
In addition, the Company's bylaws require that the Company be given
advance notice of stockholder nominations for election to the Company's Board
of Directors and of other matters of which stockholders wish to present at an
annual meeting of stockholders (other than matters included in the Company's
proxy statement in accordance with Rule 14a-8). The required notice must comply
with the Company bylaws and be received not less than 60 days nor more than 90
days prior to the annual meeting, provided, however, that if less than 70 days
notice or prior public disclosure of the date of the meeting is given to
stockholders, such notice must be received by the Company not later than the
close of business on the tenth day following the date on which the notice of
the date of the meeting was mailed or such public disclosure was made,
whichever occurs first. The persons designated in the Company's proxy statement
shall be granted discretionary authority with respect to any shareholder
proposals of which the Company does not receive timely notice.
11
12
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits listed in the Exhibit Index are included in this report.
(b) Reports on Form 8-K
None.
12
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MILLENNIUM PHARMACEUTICALS, INC.
(Registrant)
Date: November 13, 1998 By: /s/ Janet C. Bush
------------------------------
Janet C. Bush
Vice President, Finance
(Principal Financial Officer)
Date: November 13, 1998 By: /s/ William J. Curry
------------------------------
William J. Curry
Controller
(Principal Accounting Officer)
13
14
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
Exhibit
No. Description
- ------- -----------
+10.1 Agreement dated September 22, 1998 by and between the Company and
Bayer AG
10.2 Investment Agreement dated September 22, 1998 by and between Bayer
AG and the Company
10.3 Registration Rights Agreement dated November 10, 1998 by and
between Bayer AG and the Company
27.1 Financial Data Schedule for the nine months ended September 30,
1998
27.2 Restated Financial Data Schedule for the nine months ended
September 30, 1997
99.1 Pages 44 through 58 of the Company's Annual Report of Form 10-K
for the year ended December 31, 1997, as filed with the Securities
Exchange Commission (which are deemed filed except to the extent
that portions are not expressly incorporated by reference herein).
- --------------
+ Confidential treatment requested with respect to certain portions
14